Depreciation is a key concept in the 1031 exchange, which is a tax-deferred exchange of like-kind real estate properties that allows an investor to defer paying capital gains tax on the sale of a property. The investor can defer paying taxes on the gain from the sale if they reinvest the proceeds from the sale into a new like-kind property. The depreciation of a property can impact the amount of taxes due on a 1031 exchange.
Key-Takeaway
- 1031 exchanges are tax-deferred exchanges of like-kind real estate properties.
- The depreciation of a property can impact the amount of taxes due on a 1031 exchange.
- The investor can defer paying taxes on the gain from the sale if they reinvest the proceeds from the sale into a new like-kind property.
Example
An investor buys a rental property for $200,000 and takes $20,000 in depreciation over five years. They sell the property for $300,000 and use a 1031 exchange to purchase a new property for $300,000. The investor would need to pay taxes on the $100,000 gain from the sale, minus the $20,000 in depreciation.
Tips
- Consult a tax professional or real estate attorney to ensure that the 1031 exchange is correctly structured.
- It is important to understand the tax implications of the depreciation of a property and how it can impact a 1031 exchange.
- Ensure that the new property acquired in the 1031 exchange is of like kind and meets the other requirements of a 1031 exchange.
Recommendations
- Consider using a qualified intermediary to handle the 1031 exchange to ensure that all requirements are met.
- Keep accurate records of the depreciation taken on a property and the sales price, as these will impact the taxes due on a 1031 exchange.
- Plan and give yourself enough time to complete the 1031 exchange, as strict time limits must be met.